A number of anonymous trading systems are known in the art. EP-A-0,399,850, EP-A-0,406,026 and EP-A-0,411,748 all assigned to Reuters Ltd disclose aspects of an automated matching system in which a host computer maintains a central database of bids and offers submitted by terminals connected to the host via a network. The host also maintains records of credit limits between each trading bank and the possible counterparties with which it is willing to trade. The host computer uses information in its central database to match bids and offers and buy and sell orders based on matching criteria which include the counter party credit limits.
Generally, counterparty credit limits are set for each bank or each trading floor and the host computer establishes a gross counter party credit limit for each possible pair of counterparties. The gross counter party credit limit is the minimum amount of remaining credit between two counterparties.
A trader's terminal will display a subset of the trading book, typically the best few bids and offers. These will be updated periodically to ensure that the trader sees the true state of the market.
A problem with the system outlined above is that the trader sees the bids and offers irrespective of whether he has sufficient credit with the counter party submitting that bid or offer to trade. As a result, a trader can attempt to trade when there is no available credit. As the system is anonymous the trader has no knowledge of the counterparty until a trade as been completed and so, when he hits a bid or offer, has no idea as to whether it is likely to be accepted or rejected for lack of credit. This is extremely frustrating for a trader, particularly in a fast moving market in which trading opportunities can easily be lost. The problem arises as the host computer only checks available credit after a deal has been proposed and a potential match identified.
This problem was solved in WO93/15467 now assigned to EBS Dealing Resources Inc., the contents of which are incorporated herein by reference. Instead of displaying the actual trading book, or a part of it, to each trader, a different market view is shown to each trader in which bids and offers from counterparties which whom they have insufficient or no credit are screened out. Thus, the trader only sees prices with which he knows he can deal.
The architecture of the system of WO93/15467 is very different from the of the Reuters system and is based on a distributed network with a number of arbitrators which perform matching. Actual credit limits are stored at local bank nodes to which each of a bank's trading terminals are connected ensuring that sensitive credit data does not leave the bank's physical site. The actual trading book is sent by the arbitrators to the market distributor. The market distributor forms a market view specific to a given trading floor and sends it to the relevant bank node. A different market view may be formed for each trading floor depending on credit criteria. Thus, the market view which is distributed to each of the bank nodes is the complete market view with credit screening taking place, the market distributor to filter out any prices with which the bank, or a given trading floor within the bank, has insufficient credit.
In addition, the market distributers also have limited credit information, maintaining a credit matrix which may store a simple “yes-no” credit indicator for given counterparties. When a match is made, the prices having already been screened for credit, the bank node will make a second credit check using the credit matrix to see whether any previously extended credit has already been exhausted.
Both the above described systems have been used successfully for a number of years. However, both suffer from disadvantages associated with the geographical location of the matching engine.
In the Reuters system there is a single matching engine. In practice this is located in Long Island, N.Y., USA. Messages sent from trader terminals will take a finite time to reach the matching engine. Thus, if a trader in New York and a trader in Tokyo try and hit the same price, the New York trader's hit will always be received first. In practice, most of the trading at a given time is between traders located on the same continent but it is still disadvantageous for traders, eg. in Japan all to trade through a matching engine and deals execution system on the other side of the world as the system is inevitably sluggish.
The EBS system, in practice, provides three arbitrators, one each in New York, London and Tokyo, all three arbitrators are active of the same time and a price is owned by the arbitrator to whom the price is input is connected. Thus, where a price is input by a trader in London and hit by a trader in Tokyo, the match will be performed initially in Tokyo and then sent on the London. If, in the meantime, the same price has been hit in London, the second hit will win as it will be received by the owning arbitrator first.